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Banking News Viewpoints

Viewpoint: Bernie’s new folly is a proposed cap on credit-card interest

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By Sam Waltz

U.S. Sen. Bernie Sanders and U.S. Rep. Alexandra Ocasio-Cortez are textbook examples for the failure of economic literacy in America.

Their proposal to cap credit card interest rates at 15% is the evidence of their failure of insight.

What Sanders and Ocasio-Cortez fail to realize – or decide not to – is that interest rates, like insurance premiums, are an effective vehicle for the assignment and management of risk in America.

The less likely one is to pay back the money she or he borrows, the higher the interest rate. Simply put, lenders – knowing that some borrowers will default because they are unwilling or unable to pay back what they borrow – assign a market-based interest rate that reflects that risk to manage return on capital.

With such an interest rate, the system works. Without risk-based interest rates, the system simply fails to work, and capital will become less available, or not available at all.

As a matter of equity, in American society, some situations simply are “red-circled” and treated as the anomalies they are, e.g., people with disabilities, and they are picked up by public subsidy.

But, at a larger scale, America’s system assumes an informed and responsible consumer who makes rational decisions.

Certainly, some borrow money intending to pay it back and are unable to do so.

Many simply borrow because they can, when they can, with little or no intent to repay. But the system for the most part inhibits ongoing chronic abuse by the same borrowers.

Knowing that will occur, lenders effectively create a lottery, where the ticket becomes more expensive due to the inevitability that larger and larger losses will be shared among the risk pool.

What Sen. Sanders and Rep. Ocasio-Cortez fail to acknowledge is that capping credit-card interest rates at 15% will simply result in the contraction of credit to the people they are trying to help. Or it will spur more of the hybrid vehicles, e.g., the “secured credit cards” that Delaware native Rocco Abbessinio pioneered in his products, where credit card holders had to put on deposit savings roughly equal to the amount of credit line they wanted.

That’s likely not what Sen. Sanders and Rep. Ocasio-Cortez intend.

So, what’s the alternative?

Frankly, it’s the establishment of publicly guaranteed credit cards as a “public utility,” that is, in Sen. Sanders’ world of “confiscation and redistribution,” taxpayer guarantees of some form for those who decide to default, or are forced to.

It’s either that or the transfer of the liability to shareholders, which of course will gut the stock prices of banks, since shareholders would become the unwilling co-signers to loans on a generation of deadbeats who know the lenders’ have little or no recourse to them.

That’s the Green New Deal – this generation’s version of Obamacare that devastated America’s health insurance system by requiring relatively healthy young people to pay for their parents’ health care via criminalizing their self-interested predisposition to skip buying health-care insurance and assume the risk themselves.

It didn’t work with Obamacare, and it won’t work with Sen. Sanders’ 15% cap.

But, at risk for Delaware presumably are the thousands of jobs in Delaware’s credit-card industry, as well as the vulnerable retirements of taxpayers who would become the ultimate loan guarantors for those who would benefit by the Sanders and Ocasio-Cortez folly.

I sure hope they stop before they hand a platinum Visa card to the guy with the cardboard sign at the intersection near my house!

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